Moody's Investors Service has today downgraded the senior debt and deposit ratings of Banque et Caisse d'Epargne de l'Etat (BCEE) to Aa1 from Aaa, prompted by the downgrade of the standalone bank financial strength rating (BFSR) to C (mapping to an a3 standalone credit assessment) from C+/a2. The short term Prime-1 ratings were unaffected. The outlook is stable on all ratings.

Today's downgrade of BCEE's standalone rating to a3 is due to (i) the bank's material borrower and industry concentrations, notably to Italian government bond holdings and to the European banking sector in general; and (ii) the bank's vulnerability to an economic deterioration of the
operating environment in Europe, including Luxembourg, which could ultimately affect its asset quality.

The positioning of BCEE's long-term ratings at Aa1 reflects (i) the standalone credit assessment of BCEE; and (ii) Moody's continued assumption of very high systemic support being extended from the Grand Duchy of Luxembourg (Aaa, stable) to BCEE in case of need, based on the 100% state ownership and the bank's leading market shares in Luxembourg with around 43% of domestic retail mortgages based on central bank data.

Moody's notes that several mitigating factors have limited the magnitude of today's downgrades. Firstly, the bank's liquidity position is amongst
the strongest across European banking peers. Secondly, BCEE's large portion of retail activities provides a certain degree of earnings stability, which has allowed the bank to strengthen its capital position and therefore improve its ability to absorb unexpected losses.

The rating action on the BFSR and the long-term debt and deposit ratings concludes the review initiated on 15 February 2012 (see "Moody's reviews
Ratings for European Banks" - http://www.moodys.com/research/Moodys-Reviews-Ratings-for-European-Banks--PR_237914) while the rating action on the subordinated debt ratings concludes the review of those ratings initiated on 29 November 2011(see Moody's reviews European banks' subordinated, junior and Tier 3 debt for downgrade - http://www.moodys.com/research/Moodys-reviews-European-banks-subordinated-junior-and-Tier-3-debt--PR_231957).

Please click on this http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143132 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer. For additional information on bank ratings, please refer to the webpage containing Moody's related announcements http://www.moodys.com/bankratings2012

RATINGS RATIONALE

The lowering of BCEE's standalone rating, and debt and deposit ratings, primarily reflects the following rating drivers:

FIRST DRIVER --- LARGE INDIVIDUAL AND INDUSTRY BORROWER CONCENTRATIONS

As a consequence of its historical excess of funding over its lending activities, the bank has a large liquidity position in the form of a sizeable investment portfolio, which exhibits material credit risk concentrations. This portfolio remains highly concentrated on the European banking and sovereign sectors and is significant relative to BCEE's capitalisation. In the context of the current worsening euro area debt crisis, Moody's believes that BCEE's investment portfolio is more vulnerable than before. Despite the sizeable reduction of its exposures to Italian government bonds -- net exposure of EUR980 million as per unaudited Q1 2012 financials, compared with EUR2.3 billion according to audited FYE 2010 financials -- this exposure remains significant, representing 53% of the bank's Tier 1 capital (EUR1.8 billion as per unaudited Q1 2012 financials). Similarly, the ten largest senior unsecured banking exposures represented EUR3.7 billion at end-March, equivalent to 200% of Tier 1 capital.

Set against this, Moody's notes that the banks' bond portfolio remains highly liquid and exhibits high credit-quality assets. However, its high concentration constrains the bank's standalone rating at the C/a3 level.

SECOND DRIVER --- VULNERABILITY TO DETERIORATING OPERATING ENVIRONMENT

With leading and unthreatened market shares in retail banking, the bank is mainly exposed to Luxembourg's economy. Luxembourg remains one of the
strongest economies in the euro area; however, Moody's notes the bank operates in a comparatively small market. Moody's anticipates that the
worsening euro area debt crisis and the difficult overall European operating environment will lead to mounting negative pressures on the overall asset quality of Luxembourg banks, including BCEE.

BCEE's loan book is primarily exposed to domestic mortgages. Although the Grand-Duchy's housing market has proven resilient so far, Moody's notes
that it has been supported partly by high inflows of employees in Luxembourg, which is an important European financial center. Moody's notes that the attractiveness of the Grand-Duchy as a workplace could decrease during economic downturns which in turn could result in lower demand for properties and thus negatively affect house prices. In addition, BCEE exhibits large exposures to domestic corporates and SMEs, which are likely to be particularly vulnerable to the current macroeconomic cycle. For this reason, Moody's expects asset-quality to deteriorate in the short-to-medium term. This, in turn, would reduce the bank's overall profitability through higher provisioning costs.

MITIGATING FACTORS

Moody's notes that several mitigating factors have limited the magnitude of today's downgrades. Firstly, BCEE is not structurally reliant on market funds, and is therefore considered to be less vulnerable to investor confidence than many of its European peers. This is reflected by the bank's low loan-to-deposit ratio of 68% as at year-end 2011. Deposits represent nearly two-thirds of the bank's balance sheet according to audited 2011 financials and mainly comprise saving deposits which we generally consider less credit sensitive by nature. Additionally, Moody's considers that BCEE's large securities portfolio represents a solid liquidity buffer. As at year-end 2011, the bank's investment portfolio comprised EUR10.4 billion of liquid assets immediately eligible for central bank refinancing, after haircut, representing roughly one quarter of total assets. Moody's considers BCEE's liquidity position as being
amongst the strongest across European banking peers.

Secondly, BCEE's large portion of retail activities provides a certain degree of earnings stability, which allowed the bank to strengthen its capital position and therefore improve its ability to absorb unexpected losses. Although currently modest, the profitability of retail activities continues to prove resilient. Moody's believes that BCEE's low risk profile -- as illustrated by its retail-focused franchise -- and liquid balance sheet could help alleviate the effects of economic cycles.

RATINGS RATIONALE -- DEBT & DEPOSIT RATINGS

The downgrades of BCEE's debt and deposit ratings reflect the one notch lowering of the bank's standalone credit assessment to a3. BCEE's Aa1 senior unsecured long-term ratings continue to incorporate a very high probability of systemic support, which provides five-notches of rating uplift. This exceptional level of support is underpinned by (i) BCEE's leading position in domestic retail banking; (ii) its full ownership from the Grand-Duchy of Luxembourg, which has proven to be stable since the creation of the bank more than 150 years ago; and (iii) its role in the development of the local economy, as stipulated by law in its status and mission, whereby the bank provides financing to certain key sectors of the economy.

RATING OUTLOOKS ARE STABLE

The stable rating outlooks for BCEE express Moody's view that currently foreseen risks to creditors are now reflected in these ratings. Nevertheless, negative rating momentum could develop if conditions deteriorate beyond current expectations. Specifically, Moody's has factored into the ratings an increased risk of an exit of Greece from the euro area, but this is currently not Moody's central scenario. If a Greek exit became Moody's central scenario, further rating actions on European banks could well be needed.

RATIONALE FOR SUBORDINATED DEBT AND JUNIOR SUBORDINATED DEBT DOWNGRADES

The downgrade of BCEE's subordinated debt and junior subordinated debt ratings to Baa1/(P)Baa1 and (P)Baa2 respectively (one and two notches below its a3 standalone credit assessment) reflects Moody's view that systemic support is less likely to be extended to subordinated instruments going forward.

WHAT COULD MOVE THE RATINGS UP/DOWN

An upgrade of the bank's long-term ratings is unlikely in the near term, given the already very high systemic support factored into the ratings. Nevertheless, continued improvements in profitability and efficiency, reduced credit-risk concentrations -- whilst maintaining a conservative risk profile -- would exert upward pressure on the bank's BFSR. Factors that could exert downward pressure on the BFSR include a weakening of the bank's franchise in Luxembourg or a further significant deterioration of the public finances of the countries that BCEE is exposed to, principally Italy. More generally, downward pressure on the BFSR could develop following marked deterioration of the institution's financial fundamentals, or if Moody's considers that BCEE's risk positioning has weakened.

The long-term debt and deposit ratings would likely be downgraded in the event of a downgrade of the BFSR. The long-term rating could also be downgraded independently from any action on the BFSR rating, if Moody's lowers its assessment of systemic support. This could result from (i) a
diminished ability of the Grand-Duchy to support banks; and/or (ii) Moody's re-evaluating the systemic support uplift it currently factors into the long-term ratings.